Saudi Arabia injects 20b riyals into banks to ease crunch

[DUBAI] Saudi Arabia's central bank stepped up efforts to support lenders in the Arab world's biggest economy as they grapple with the effects of low oil prices.

The Saudi Arabian Monetary Agency, as the central bank is known, is giving banks about 20 billion riyals (S$7.2 billion) of time deposits "on behalf of government entities." It's also introducing seven-day and 28-day repurchase agreements, as part of its "supportive monetary policy." It didn't provide further details.

The announcement, which comes as the kingdom prepares for its first international bond sale, is the latest step by the central bank to ease a cash crunch in the banking system. The Saudi Interbank Offered Rate, a key benchmark for pricing loans, has surged to the highest in seven years after the plunge in oil prices forced the government to withdraw money from the country's banking system, squeezing liquidity. The central bank was said tohave offered lenders 15 billion riyals in short-term loans in June to help ease liquidity constraints.

The move is "the next step in the continuing story we've been hearing since the start of the year on the tightening of liquidity among Saudi banks and a follow-on to the first injection provided to banks earlier this year," said Murad Ansari, a Riyadh-based analyst at investment bank EFG-Hermes.

"The liquidity situation remains challenging. However, it shows that the central bank will continue to support Saudi banks."

Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said authorities probably wanted to address concerns among investors before the planned Eurobond sale, which people familiar with the matter said would be at least US$10 billion.

The latest step "will show investors that the government is committed to support the banking system," he said. The bond sale would help finance a budget deficit that the International Monetary Fund expects to reach about 13 per cent of economic output this year.

The cash crunch risks undermining bank's ability to lend to businesses, adding to the strain facing economic growth at a time when the government is cutting spending to shore up its public finances. The economy will likely expand 1.1 per cent in 2016, according to a Bloomberg survey, the slowest pace since 2009.

The central bank has already raised the limit of how much banks can lend to 90 per cent of deposits from 85 per cent, people familiar with the matter told Bloomberg in February. It also cracked down on currency traders amid speculation that the country won't be able to maintain the riyal's peg to the dollar, people with knowledge of the matter said. The central bank has repeatedly said it was committed to the peg.

"Sama is being proactive to ensure liquidity meets economic and financial requirements, said Monica Malik, chief economist at Abu Dhabi Commercial Bank, using an acronym for the central bank.

"This will provide a breather to the banks and the planned sovereign bond issue will also help. However the government's funding requirements are much larger and the issue of tight liquidity is likely to persist."

The Saudi index for banking shares has declined 17.6 per cent this year, compared with a 14.4 per cent drop for the benchmark Tadawul All Share Index.

BLOOMBERG